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The graph below shows the actual distribution of money income for 2013 and the line of perfect equality. If income was distributed with perfect equality, 20% of the households would have 20% of the income, 40% of the households would have 40% of the income, etc. In actuality, the Lowest Income 20% of households have 3.2% of total money income, the Lowest Income 40% of households have 11.6% of total money income, etc. The gap between the line of perfect equality and the actual distribution curve indicates the degree of income inequality. % of Income 100% - 80% - 60% - 40% - 20% - Perfect Equality 0% 0% 20% 40% 60% 80% 100% % of Households Degree of Inequality Actual Distribution The distribution of income has been growing more unequal in recent decades. Example 2: In 1971, the Highest Income 20% of households had only about 11 times the share of total money income as the Lowest Income 20% of households (43.5% versus 4.1%). Some argue that the increase in income inequality in recent decades was due largely to increased immigration. Example 3: Between 1970 and 2013, the foreign-born population in the U.S. increased from 9.6 million to 41 million. The percentage of the U.S. population that is foreign-born increased from 4.7% in 1970 to 13.1% in 2013. Immigrants have a median annual income over 12% lower than native-born Americans. Thus, the increased number of immigrants reduces the median income of the Lower Income Groups and widens the gap between the Highest and Lowest Income Groups. Overstating the Degree of Income Inequality The distribution of money income overstates the degree of income inequality in two ways. First, the distribution of money income does not take into account the effect of taxes paid or of in-kind transfer payments received. Money transfer payments (e.g. unemployment compensation, social security benefits) are included in money income. In-kind transfer payments (e.g. Medicare, Medicaid, the Supplemental Nutrition Assistance Program) are not included in money income. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Income Distribution and Redistribution 31 - 2

Income is more equally distributed after taking taxes and in-kind transfer payments into account. Higher income households pay a higher percentage of income in taxes. In-kind transfer payments are received disproportionately by lower income households. Example 4: After taking federal taxes and in-kind transfer payments into account, the Highest Income 20% of households have about 8 times the income share of the Lowest Income 20%, according to the Congressional Budget Office. The second way that the distribution of money income overstates the degree of income inequality is by focusing on income distribution at a point in time (e.g. 2013) rather than over the course of a lifetime. Income is distributed more equally over the course of a lifetime than at a point in time. Many people in the Lowest Income 20% of households are young people at the start of their careers. Most of these young people will move into higher Income Groups as their careers progress and they develop more human capital. Example 5: In 2012, only 47.3% of households in the Lowest Income 20% were headed by a person from 35-64 years of age. 79.5% of households in the Highest Income 20% were headed by a person 35-64 years of age. If career incomes were compared or if incomes were compared for households at the same career stage (e.g. compare 30-year-olds to 30-year-olds, 50-year-olds to 50-year-olds, etc.), the gap between the highest and lowest Income Groups would be much smaller. Distribution of Wealth In one way, the distribution of money income understates the inequality problem. The terms “rich” and “poor” refer to wealth distribution rather than to income distribution. The distribution of wealth is much more unequal than the distribution of income. Example 6: In 2010, the top 20% of wealth holders had roughly 89% of total wealth. The bottom 20% of wealth holders had roughly 0% of total wealth. The greater inequality in the distribution of wealth has two primary causes: 1. Differences in savings rates. High-income households typically have much higher savings rates than low-income households. Example 7: The table below represents income, savings rate, and wealth for Max, a high-income person, and Minnie, a low-income person. The higher savings rate for Max means that there is a bigger gap in wealth accumulation between Max and Minnie than the gap in income. Max has 16 times as much income as Minnie, but 80 times as much wealth. Max Minnie Income $160,000 $10,000 Savings Rate 10% 2% Wealth Accumulation $16,000 $200 2. Wealth distribution is measured at a point in time. Wealth, like income, is distributed more equally over the course of a lifetime than at a point in time. Example 8: In 2011, households headed by a person 65 to 69 years of age had a median household net worth 29 times greater than households headed by a person under 35 years of age. If wealth were compared for households at the same career stage (e.g. compare 35-yearolds to 35-year-olds, compare 65-year-olds to 65-year-olds, etc.), the gap between rich and poor would be much smaller. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 31 - 3 Income Distribution and Redistribution